It was just a dream.

Wednesday must have been a bad dream because everything that was good was bad.  On Thursday, stocks recovered most of the previous day’s losses and there appears to be a change of attitude.  Market forces rewarded companies that had good earnings and momentum traders appeared to be licking their wounds.

This action has been good because the movement has been constructive. What has yet to be decided though is where we are transitioning to because as we know volatility increases around transition points. Sentiment has been tested. Central banks and geopolitical forces actions still have the capacity to move markets.

So who is the suspect for causing Thursday’s rally? Tech certainly contributed. However, it was Ford. Yes, Ford. Who would have thought?  Stock and credit traders were expecting bad numbers. However, Ford did not lower its guidance and investors took that as a divine signal and rallied the market. One has to remember Ford investors have lost potentially 34% this year so some positive news would be welcome. Ford’s shares rallied 9.9% today as Ford committed to regular dividends, maintaining an investment grade credit rating and a strong balance sheet. Voila, and the market rallied.

So what did bonds do?  Well, they sulked. Bonds drifted higher in yield and the curve flattened slightly. The 7-year auction flagged some concerns. Direct bidders showed little interest causing some to believe that China has stopped participating in the bond auctions. The activity in this week’s auctions has been unusual as demand in all three auctions this week have been weak. Direct bidders in the previous two auctions have taken the lowest share since 2011. The bid to cover ratio for the 7-year notes was 2.39 and the bonds median was 3.024%. Primary dealers showed little enthusiasm in today’s auction.

Be watchful though because bonds are brooding. Today despite the strong equity rally, bonds hardly budged. Maybe there is a belief that today’s rally is a relief rally and cannot be sustained and that’s probably the crux of the argument. Bonds should be weaker given the lack of demand and that’s probably why bond investors did not react to today’s equity price action. There is more to come, it’s more a matter of when.

The ECB in its statement today remains on track to hike rates in autumn 2019 despite a darker growth outlook and turmoil caused by Italy. The asset purchase scheme will end this year. Draghi remains hawkish despite issues arising from market volatility and trade protectionism. The ECB, however, will still be a force in the market as it looks to replace maturing debt. As debt matures, it is not always being replaced as in the case of Germany.

Keep a watchful eye on U.S. business spending on capital goods; orders fell 0.1% in September. Spending on plant and equipment is stalling and the goods trade deficit has increased by 0.8%. Part of the slowdown can be attributed to the America First policy set by the Trump Administration and this is causing input costs to rise on items such as imported steel and raw materials.

October has been a month of lost opportunity. A month ago, a number of markets were providing solid returns.  That has all changed. Cash has dethroned risk assets and bonds are positive in a global sense. Prior to October, multi-asset investors were on track to deliver the lowest share of positive returns across 17 asset classes since 2008(Morgan Stanley data). The dollar and oil look like being one of the few assets to make a gain. Treasuries and some credit are still positive.

Market Recap.

Equities: The S&P was up 1.86% and the Dow recovered 1.63% and the NASDAQ Composite was up 3%. The Stoxx rose 0.5%. The Vix closed at 23.15.

Currencies: The Bloomberg Dollar Index rose 0.1% while the pound fell 0.5% and the euro fell 0.2%.

Bonds: The ten-year closed around at 3.126%. The 2-year closed at 2.855% and the 30-year closed at 3.346%. The ten-year bund closed at 0.397% and the OAT closed at 0.77%. The U.S. curve closed on the day with the following closes 2/10 at 26.9 bp, 2/30 at 49 bp and the 10/30 closed at 21.8 bp. The U.S. 5-year closed at 2.97%.

Commodities: WTI rose 0.4% while Gold fell 0.3%.

Bitcoin is trading around $6,408.

Aussie Market Today.

Today should be interesting. Expect equities to rally but that could come to a standstill. Market movement in Asia will provide guidance.

Bonds were steady overnight when they ought to have been trashed. Bond investors are still not believing Thursday’s equity rally. This can go either way but with the weekend the bonds could drift higher in yield as investors reduce positions ahead of the weekend.

Aussie could strengthen a little on the day. The strength of king dollar will determine the Aussie battlers direction.

The direction for markets appears to be strongly influenced by Asia. Look north for some guidance.

Geopolitical risks remain high.